Entire Market Value Rule Strikes Again in WDTX
On January 3, 2022, Magistrate Judge Susan Hightower granted a defendant’s motion to exclude an expert’s damages theory for violating the entire market value rule, reminding plaintiffs everywhere to use caution when applying the sales of an entire product as a royalty base.
In Via Vadis, LLC et al. v. Amazon.com, Inc., 1:14-cv-813, Dkt. No. 230 (W.D. Tex. Jan. 3, 2022), Via Vadis, LLC (“Via”) alleged that Amazon.com, Inc. (“Amazon”) directly and indirectly infringed Via’s patent for data access and management systems based on Amazon’s use of the BitTorrent protocol in its S3 cloud storage product. Amazon argued that the correct royalty base is the revenue generated by the BitTorrent interface alone, totaling $250,000. While the Court stated that the excerpts in the record do not indicate what Via’s royalty base was, Via’s damages expert began the royalty calculation with the total revenue generated by Amazon’s S3 cloud storage product, $22 billion, and then apportioned the value of the BitTorrent protocol to S3, concluding that the value was in excess of $30 million.
Judge Hightower granted Amazon’s motion to exclude Via’s expert’s damages calculations despite Via’s absence of a stated royalty base, stating that “the entire market rule is implicated by starting the royalty calculation with total S3 revenues – notwithstanding subsequent apportionment – rather than the market value for the BitTorrent service.”
In any patent infringement case, successful plaintiffs are entitled to at least reasonable royalty damages attributable to the infringing use of an invention. A patentee seeking such a royalty must only pursue damages attributable to the infringing features of the accused product, and not the entire value of the product. When multi-component products are at issue, such as Amazon’s S3 platform, the entire market value rule requires that the combination of royalty base and royalty rate reflect only the value attributable to the infringing feature of the product and no more, unless it can be proven that the patented feature creates the basis for customer demand or substantially creates the value of the component parts. In granting the motion to exclude Via’s royalty calculation, Judge Hightower concluded that Via’s “single sentence concerning ‘the importance of price’ to Amazon’s S3 customers falls far short of meeting its burden to establish that BitTorrent ‘was the sole driver of consumer demand’ for Amazon’s entire cloud storage service.” According to the Court, without such evidence it was improper for Via to use S3’s entire revenue as a royalty base.
Relying on the Federal Circuit’s holding in LaserDynamics, Inc. v Quanta Computing, Inc., Judge Hightower found that such a starting point violated the entire market value rule because “disclosure of . . . complete product [revenue] rather than the patented component only,” without demonstrating a correlation to the value of the patented feature alone, can “artificially inflate the jury’s damages calculation,” and result in a damages award that exceeds the amount adequate to compensate Via for infringement. The Court therefore ruled that the damages theory was unreliable and irrelevant since the accused feature, the BitTorrent interface, generated less than $250,000 of the $22 billion in revenue attributable to S3.
This ruling provides an important reminder to patentees seeking to recover reasonable royalty damages, namely in the absence of revenue data specifically attributable to the infringing feature of a product, patentees must provide strong evidence to prove the infringing feature drives consumer demand to the larger product and, when apportioning total revenue of a component product, state and provide evidence for the royalty base. Without such evidence, patentees may be left with a favorable judgment but a wanting damages figure.